McDonalds to Outperform on Restaurant Revamp: Guggenheim

Shares of global fast food giant McDonald's Corp. (MCD) are set to outperform the broader market after a period of weakness, according to one team of bulls on the Street.

In a note to clients on Wednesday, analysts at Guggenheim upgraded shares of the Chicago-based burger chain to Buy from Neutral, citing the company's restaurant revamp as a positive tailwind in the second half of 2018 and into next year. (See also: Goldman Sachs Adds McDonald's to Conviction List.)

Revamp to Drive Customer Visits and Higher Average Bill

Analyst Matthew DiFrisco issued a $200 price target on McDonald's stock, implying a near 21% upside over 12 months. With trading down 1.6% at $165.71 this morning amid a broader market selloff, MCD shares reflect a 3.7% loss year-to-date (YTD) compared to the S&P 500's 4.4% return over the same period.

DiFrisco pointed to McDonald's efforts to "elevate the consumer experience" over the past year with its "Experience of the Future" revamp, which includes kiosks for ordering and table service. DiFrisco indicated that by the end of Q2, more than 4,000 of the 14,000 U.S. McDonald's locations were either fully or partially converted. The company is targeting for self-order kiosks at 1,000 more stores per quarter.

The strategic initiative has dragged on some restaurants' sales, since stores must close their doors for the period of installation, but DiFrisco expects the headwind to quickly reverse and become a tailwind. The Guggenheim analyst noted that stores with partial upgrades have benefited from a 1% to 2% increase in sales, forecasting that the initiative will continue to drive more frequent customer visits and higher average checks. By modernizing their restaurants, McDonald's will further cement its "global leadership atop the fast food category as digital mobile ordering continues to redefine convenience and personalization for the consumer," DiFrisco said.

DiFrisco views McDonald's as trading at a significant discount to rivals, noting its multiple of 15.6 times enterprise value to earnings before interest, tax, depreciation, and amortization. At this level, the stock is trading at 33% and 21% below that of Domino's Pizza Inc. (DPZ) and Yum! Brands Inc. (YUM), respectively.

"We see valuation upside to shares in MCD by simply applying a reversion back to its historical discount to peers," wrote the Guggenheim bull. (For more, see also: How McDonald's Makes its Money.)

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